Regulatory Hurdles In China Will Limit Growth But Value Persists

Key Takeaways

• Expanding in new regions and innovating with AI boost engagement, but growing regulatory and competitive pressures may limit future revenue and pricing power.
  
• Maturing content and global demographic trends risk slowing user growth, while tightening privacy rules could constrain margins from personalized monetization.
  
• Slowing core market growth, limited international ARPU gains, feature engagement challenges, and reliance on app platforms present risks to near-term earnings trajectory.

Catalysts

Operates as a mobile learning platform in the United States, the United Kingdom, and internationally.

• Although accelerating DAU and user engagement trends, combined with deeper international expansion-especially in Asia and China-point toward a rising user base and higher long-term total addressable market, Duolingo's growth may be constrained by slowing global population growth, which could lead to a smaller pool of new language learners and stunt revenue growth over time.
  
• While ongoing investments in AI-driven product innovation and highly personalized learning experiences have supported improvements in subscriber retention and daily usage metrics-drivers of both ARPU and net margins-the proliferation of open-source, AI-powered competitors poses a future risk of commoditization, threatening Duolingo's ability to sustain premium pricing and margin expansion.
  
• Despite Duolingo's early success with paid subscriptions, especially its new Max tier and positive signs from international markets, regulatory barriers (such as China's local LLM approval requirement) and delayed feature rollouts could hinder timely monetization in key high-growth regions, impacting earnings growth and profitability trajectories.
  
• Even as the secular shift to mobile learning and a knowledge-driven global workforce aligns with Duolingo's platform expansion into new subjects (Chess, Math, Music), a maturing content library risks user fatigue and content saturation, which can flatten DAU growth and limit future revenue acceleration.
  
• Although the company is managing to lower AI infrastructure costs and improve operating leverage through scale, heightened digital privacy regulations globally may increase compliance expenses and curtail Duolingo's ability to optimize user monetization through personalized advertising, compressing long-term net margins.

Duolingo Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Duolingo compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Duolingo's revenue will grow by 22.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.2% today to 18.2% in 3 years time.
• The bearish analysts expect earnings to reach $296.8 million (and earnings per share of $6.29) by about August 2028, up from $117.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 84.0x on those 2028 earnings, down from 143.7x today. This future PE is greater than the current PE for the US Consumer Services industry at 18.7x.
• Analysts expect the number of shares outstanding to grow by 5.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

Duolingo Future Earnings Per Share Growth

Risks

• User growth in the US, a mature and highly penetrated market, has been decelerating with year-over-year DAU growth slowing, and the company is only now turning on incremental marketing spend in the region, potentially putting pressure on future revenue trajectory if investment fails to reignite growth.
  
• Despite global expansion, regulatory challenges have impeded the rollout of high-value products like Duolingo Max in key growth markets such as China, constraining the company's ability to boost average revenue per user and thus limiting earnings and net income growth internationally.
  
• Engagement and conversion rates for AI-powered features such as Max's Video Call have been lower than management anticipated, particularly with beginner users finding it too difficult, which could cap ARPU expansion and slow long-term margin improvement.
  
• The company relies heavily on platform distribution via Apple and Google, and although web checkout tests indicate higher net margin potential, uncertainty in app store policies and payment flows remains a structural risk to future profitability.
  
• While diversification into Math, Music, and Chess may grow total addressable market over time, management explicitly cautions that these initiatives are not designed to materially impact revenue in the near term, suggesting that long-term earnings growth could be less robust if language learning monetization plateaus or matures.

Valuation

• The assumed bearish price target for Duolingo is $390.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Duolingo's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $600.0, and the most bearish reporting a price target of just $390.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $296.8 million, and it would be trading on a PE ratio of 84.0x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $370.34, the bearish analyst price target of $390.0 is 5.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.